RBI's MPC delivers again, takes 2025 rate cut tally to 125 basis points

Repo rate cut by 25 bps, stance still neutral; liquidity boost via ₹1 trn OMO in Dec

With the conviction that headline inflation will stay benign for the next six to nine months, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously decided to lower the policy repo rate by another 25 basis points (bps) to 5.25 per cent on Friday, the lowest in over three years.

 

Lending rates for retail home loans and car loans which are linked to external benchmarks like the repo rate, will be adjusted immediately. One basis point equals 0.01 per cent. Moreover, with an eye on transmission of policy rates to lending and deposit rates, the central bank announced ₹1 trillion of fund infusion by open market operation and a 3-year USD/₹ Buy Sell swap of $5 billion – both to be conducted in December, so that liquidity with banks remains ample.

 

The mild inflation trends along with the 8 per cent growth recorded by the economy in the first half of 2025-26 (FY26) present a “rare Goldilocks period” for India, said RBI Governor Sanjay Malhotra.

 

The MPC – which Malhotra chairs – has lowered the policy repo rate by 125 bps in 2025. 

 

“The MPC noted that headline inflation has eased significantly and is likely to be softer than the earlier projections, primarily on account of the exceptionally benign food prices,” said Malhotra, who will complete one year at the Mint Road next week. He stressed that underlying inflation pressures are even lower as the impact of increase in price of precious metals on retail inflation is about 50 bps.

 

Except the panel’s external member Ram Singh, all other members decided to keep the monetary policy stance neutral. Singh wanted the stance to be changed to accommodative.

 

India’s growth, the Governor said, remained resilient, but is expected to soften somewhat, even as the RBI raised its FY26 growth forecast from 6.8 per cent to 7.3 per cent. “The growth rate of about 8 per cent in the first half will not be sustained at the same level,” Malhotra said.

 

The RBI lowered the inflation projection for the current financial year to 2 per cent as compared to 2.6 per cent projected in its October policy. Moreover, inflation in the first quarter (Q1) of FY27 has also been revised lower to 3.9 per cent from 4.5 per cent earlier, with Q2FY27 inflation projected at 4 per cent.

 

“Both headline and core inflation are expected to be at or below the 4 per cent target during the first half of 2026-27,” he said. The MPC’s target is 4 per cent inflation with 2 percentage points variation on both sides.

 

“We expect inflation to remain benign. If this continues, policy rates are likely to be low rather than high,” Malhotra said, when asked if there is a space for further rate cuts during the post policy press conference. He said further scope or need for rate cut, would be dependent on data.

 

Equity markets cheered the rate cut with the benchmark Sensex rising half a percent to 85,712.37 points. Bond yields, which fell after the rate and OMO auction announcement, gave up gains by the end of the trading day due to profit booking.

 

While retail lending rates are set to decline further post the rate cut, banks will find it difficult to lower deposit rates which have already fallen by 102 bps following the 100 bps policy repo rate reduction between February and September.

 

Deposit mobilisation has become challenging even as credit growth is picking up momentum, and this is reflected in the credit-deposit rate of 80.29 per cent as on November 14. Malhotra said he expects the deposit rate to moderate as inflation adjusted real rates are high.

 

While the central bank signalled further rate cuts will be dependent on data, economists expect more rate cuts.

 

“With such unprecedented level of downward revisions [of inflation] and further prospects of downward revision looming large, the RBI has kept the door ajar for future rate decisions. However, for now, repo rate at 5.25% will be lower for longer,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

 

Nomura also reckoned that the rate easing cycle is not over, noting that the MPC, having delivered 125bp of cuts already, has the flexibility to go slow from here. “We expect a greater focus on policy transmission from here through more liquidity injections measures. In our baseline, we expect an “on hold” policy rate decision in February and the next 25bp rate cut in April to reach a terminal repo rate of 5.00 per cent,” the firm said in a note.

 

The next meeting of the MPC is scheduled from February 4 to 6, 2026.